On a recent call with an Equifax representative, my brokerage (Capital Lending Centre) was fortunate enough to have a Q&A with their strategic account executive after his 2020 Real Estate Strategy presentation.
It could have been an information overload but he took his time in explaining many parts of the consumer credit, how it has been affected, and how it can be post-pandemic. I wanted to share some important talking points with my community.
As we have seen in the news, lenders have been offering mortgage deferrals to assist with the financial burden of this pandemic. Many home-owners have been disappointed in having to pay interest on the very help provided by the deferral. And I wish we did not have to. As referenced during the presentation, this technique has beed used before in yet another crisis – the horrible Fort McMurray fires. These wildfires caused physical damage to an area roughly the size of our smallest province, Prince Edward Islands1. Not quite a global event but this tragedy affected thousands of families and required quick thinking by lenders to help consumers and the mortgage deferral techniques applied proved helpful to many Canadians. The intent of a mortgage deferral is to assist the consumer in avoiding any delinquencies, which can have a devastating impact on your overall credit. However, as mentioned, deferring your payments has its own drawbacks as you will pay more interest.
With every payment made towards your mortgage, you are paying a piece of the principle loan as well as interest charged on the principle. Interest is charged for every payment made and, unfortunately, when it comes time to pay those deferred payments, you will be paying interest on the interest on the initial payment. All in all, you will be paying more money towards your house than if you continue with your usual payment plan. A small price to pay for some who would enter delinquency if they were accountable for payments they are unable to make.
Another drawback of deferring your mortgage is the effect on your credit utilization, which is how much of your available credit is currently being used. Credit utilization accounts for 30% of your overall credit score and is something that you want to keep an eye on. Using too much of your available credit can have a negative impact on your credit score and by accepting a payment deferral on your mortgage or any other credit instrument moving forward, the amount of credit utilized no longer decreases with regular payments, and may actually increase as the interest continues to build on the loan.
Side note: Another important tip in keeping your credit utilization as low as possible is to spread out your credit usage whenever possible. If you must use more of your available credit (credit cards, lines of credit, etc.) then spread it around. This means if you are using 50% of one source of credit and need to access more funds, instead of using more credit from that source (eg. increasing usage of that credit card to 80% of the available credit), it will help your score if you used another card for the required 30%, keeping both cards at low utilization, and not anywhere close to a high utilization such as 80%.
Despite the drawbacks, deferrals have historically helped consumers through times of uncertainty such as this one and it is important to avoid delinquencies whenever possible, as they also have a negative impact on your credit score and can be difficult to recover from. So there is a definite benefit here to use the deferral if you need it. Fortunately, this is not the only option available to you if you are facing uncertainty in your ability to cover your expenses.
One other option to assist with the struggle of this economic crisis is a Reverse Mortgage. According to Equifax, delinquencies at the end of 2019 were slowly on the rise and a large demographic affected were seniors carrying high debt loads leading to increased consumer proposals and bankruptcies. The current pandemic only increases the risk to this demographic and those that were already at risk. For those aged 55 or over, a reverse mortgage may be a great option for relief as the equity is tax-free and there is no required debt servicing. You can see my video on this here.
For home-owners under 55 who believe they may be at risk of becoming delinquent, refinancing or introducing secondary mortgage financing may be good options as they can ensure debt levels remain low and payment deadlines are met.
Not sure where your credit score stands? You can get your FREE EQUIFAX CREDIT FILE here during the pandemic. This does not affect your score and it is a legitimate way to find out where you stand today. Feel free to forward this to family and/or friends.
It is of the utmost importance for Canadian homeowners and potential homeowners to keep their credit affairs in order during this time. This is a global pandemic. We Canadians can make a difference by learning and collaborating with each other, and maybe even be an example to other countries. Staying on top of our credit profiles will give us the advantage to buy and sell in the same way we could pre-pandemic.
It goes without saying that these are unprecedented times, and with unemployment rates skyrocketing and small businesses forced to close their doors, the financial stress is the most immediate impact that we Canadian are feeling from this pandemic. It is important to educate yourself on the assistance and relief tools that are available to you and make the best decisions for you and your family, now and in the future.